Posts Tagged ‘economy’

I’ve been banging the drum on this issue a bit recently, but what we’re not being told about National’s recent criticism of Labour on taxes is that they don’t actually just hate a CGT because it’s a tax, even though their loathing for taxes they themselves don’t raise, (remember, they took in huge amounts of extra tax by raising GST) is well-known. Let’s set aside for a minute Labour’s position on one, and focus on what the Greens want to do, so that we can talk about an actual CGT rather than about political uncertainty, which I promise to come back to at the end.

Now, the reason National dislike a CGT is because the upper echelons of the Party is full to the brim with people who make money off speculation, which a country with a CGT still allows, but doesn’t privilege as a loophole around income taxes. To them, this tax is economic policy that hurts their preferred method of making money, and equalizes a playing field that they have enjoyed seeing as tilted to those with sufficient capital to make money off capital gains.

The Greens want a comprehensive capital gains tax on real realized gains1, with an exemption for the family home2, which means you will never be forced to sell an asset because it becomes more valuable, in fact, taxes will only ever be paid if the owner of an asset makes a profit (after considering inflation) when they choose to sell. There is only a very small class of people for whom this would impact their day-to-day income, and thus their ability to “go shopping,” and that is people who live primarily off speculation in assets, a profession we should want to wipe out. If they’re professional investors, we want their income to be based on dividends, a financial reward for investing your capital in the productive economy. That sort of virtuous cycle is why we call our economic system “capitalism,” whatever your wider critiques of it. (and I have many)

What this will do in addition to collecting revenue is reduce the value of houses, farms, and other assets that are being bought for speculative purposes3. This might seem like a bad thing for property owners, however it really isn’t. If you buy and sell two properties in the same market, (eg. two farms in Canterbury) for the same value, you’ll likely be no better or worse off for the tax. (the sellers in each transaction will account for the tax in their asking price, but those prices will be depressed by more than the tax adjustment due to the lack of speculative demand) You might get hit badly if the CGT policy has been more effective in deflating prices in the area you want to sell than in the area you want to buy, but it’s not going to be implemented in isolation. A CGT together with a crackdown on investments to launder money, a government program to build thousands of affordable houses, and rule changes that genuinely incentivise people building and buying houses to that are occupied, should all act to depress house prices in all the overheated markets, while leaving the reasonably priced markets, such as the regions, roughly the same.

This might seem like a bad thing for business owners, who might one day want to sell their interest in a business, but it really isn’t. Why, you say? Not every business owner who sells will want to buy new assets for a new business afterwards, so it’s not like the tax balances out somehow. Instead, the benefit comes before the point of transaction, in terms of the availability of capital. Because speculative investments that allow for quick profit will now be taxed, productive investments in businesses of all sizes will become much more attractive. This means that investors will likely to be very happy to sink capital into your venture on a long-term basis, so long as they can expect periodic dividends. This will make starting ventures easier, seeking capital injections to expand easier, and, ironically enough, put local ventures on a more equal ground to ones with overseas owners, because they will have competing local capital. Even without re-investing a cent, this will stimulate the economy. And even though businesses founded before the CGT was implemented will have had to get capital the hard way in comparison, they’ll have an incumbent advantage in the marketplace, and they can always leverage the newly available capital to expand, too.

Now, onto Labour’s handling of tax uncertainty. It is fair to critique Jacinda Ardern’s statement that labour has been transparent about what it wants to do with the tax reform side of housing policy, and whether that would involve a capital gains tax that could apply to farm- and business sales. She has been clear, but she hasn’t been transparent. A transparent party would have told us what option they provisionally favour before going to the working group. However, that doesn’t mean that Bill English is being fair to her in saying she has to have numbers on such a proposal if it’s really just a sense of what option Labour favours going in to the working group. The whole point of having experts advise you is to listen to their opinions on the numbers, so if you’re genuinely going in to a reform process open to expert advice, the numbers in your starting proposal aren’t definite in the first place. If English were really sincerely critiquing her position as either a policy maker or an economist, he would know this. His crocodile tears on taxes affecting “hard-working kiwis” are nonsense. None of his economic or tax policy is sufficiently aimed at kiwis on or below the average wage.

In addition, as I’ve said above, the only people who need numbers on a CGT to know if they can go buy groceries are professional speculators. Your average waged employee won’t ever be taxed under the Greens’ proposal, and Labour is very likely to implement the same safeguards against unfairness in a CGT, but these average workers might well benefit from it in terms of being able to buy a house more easily, or being able to find a job more easily in a new business, or even being able to get capital to start their own business more easily, something every bit as much a kiwi dream for some people as owning a house.

So when you vote, ask yourself: what kind of economy do you want, and who’s got the policies to support it? Because if you want an economy dominated by big corporate farms where the actual workers are largely paid wages by overseas owners, overseas companies who can afford to set up businesses in a capital-poor environment, and people sitting on untenanted property portfolio or serially renovating houses, then you should probably re-elect the government. But if you want a diversified economy with a growing tech sector, fueled by renewable energy and maybe even some high-quality manufacturing jobs, and responsible mining that restores the environment after its done so we can keep making electronics, then you should vote to change the government. Because there’s more to voting for the economy than just finding the person who sounds most economically literate.

It’s quite possible to know what’s going on in the economy and still be captured by the interests of the current winners in the economy, like the government, or even be captured by irrational fears4 that immigration hurts the economy, like New Zealand First, but we should look at what the likely effects of economic policy would be, and also for the two long-standing governing parties, National and Labour, we should look at their record on economic indicators5. Those things both make it clear that only a progressive government, with the Greens moderating Labour’s policies to make them more about ordinary people and to commit them to a CGT or similarly effective policy to reform our economy, will deliver real economic prosperity decades into the future.

…a national budget.
It’s a frequent meme of right-wing economics1 that the reason we must cut costs for social services is because we must treat our national finances like our household finances, and Responsibly Pay Off our debts.

This is of course complete garbage. Not only is the specific analogy flawed, really, the only thing the two concepts even hold in common is that they’re both budgets.

Let’s try the metaphor in reverse to see how well it works. Say I treated my household’s budget like a national budget. I live with three other people, and none of us have joint finances. Firstly, if I could act like this were a national budget, I would be visiting the neighbours and using my good credit record to borrow a bunch of money, and there’d be nothing other than the pressure from my neighbours to compel me to ever pay it back, and not only that, if I borrowed enough cash from them, (a commonplace occurrence in national budgets) I would have a sort of perverse control over them where they could be bullied into doing things that are in my best interests even though they don’t want to, like say, letting me put some sort of experimental composting system in their backyard.

And of course, if my household budget were like a national budget, I would be under no compulsion to spend money on what it’s actually intended for- the US is most famous for this trick, robbing its social security fund to pay for deficit spending and then turning around to complain that the fund doesn’t have the cash it needs to actually pay people benefits they’ve earned, because they’ve stuffed the piggybank full of IOUs. That would be like me taking all the power money my flatmates pool with me and blowing it on smashed avocado toast or 26 lattes a day, and whatever else millenials are supposed to spend money on irresponsibly.

So, you’re beginning to see some of the holes, right?

The other interesting thing is that ironically, national debts are actually a lot more like the notion of a “gift economy” than they are like the notion of modern consumer debt that you’re chased down if you can’t pay back. In a gift economy, it’s difficult to truly quantify how much a favour is worth, because nobody uses currency. So you and your neighbours keep doing each other favours backwards and forwards, and often nobody’s sure of who’s ahead and behind, but suddenly everyone’s success is tied together and you’ve formed a community. In foreign relations, some deals work a lot like the gift economy. This isn’t exactly the case with sovereign debt, but there is the similar effect I described earlier, where a foreign nation who has bought up a lot of your debt can become a de-facto economic ally because they are dependent on your ability to service that debt. China currently has that type of relationship to the USA.

Now, is it important to pay off our debts? Yes and no. It’s important that internationally, everyone try to even out their budgets so they’re not heavily in debt and they’re not heavily in surplus, both of which create inefficiencies and inequalities in our increasingly interconnected financial system. (Keynes proposed a system to solve a problem similar to this with the balance of trade, called the International Clearing Union, and it’s kinda surprising the concept was never extended to national debt and sovereign wealth)

But it actually doesn’t precisely matter if we go into deficit or debt from time to time, so long as we have sound fiscal management that can get us out of debt from time to time, and no government gets us into so much debt that the interest payments become burdensome. In fact, completely counter-intuitively, it’s actually good for the economy during a recession for the government to be running a deficit, if it’s doing so to buy a lot of goods or services from its own economy, or to directly employ a lot of people who didn’t have jobs. Why? Because sometimes the economy slows down too much due to events in the private sector. During those times, the best thing the government can do is actually step in to employ people, to pay their expenses while they re-train, or to contract a lot of goods it might need later. These programs are very effecient during a recession, because the money is highly likely to be recirculated multiple times, heating the economy back up from a cold start.

In contrast, when the economy is already doing well, it makes a lot of sense to start being efficient with government spending, to cut back on programs that may be wasteful or no longer needed, and to reign in the stimulus to the economy of government spending, and to use that freed-up tax revenue to pay down debt, or even put a little sovereign wealth aside for a rainy day in the future. Why? Because often you can overheat the economy, causing it to sell goods or services that aren’t really needed, and to cause a huge over-correction when the realisation hits the market that all the economic activity was overvalued. (like the dotcom crash when people thought practically any website would be raking in money hand over fist… until actually they discovered they weren’t) By pulling on the reigns, the government can often prolong a period of growth, and save on a lot of inefficiencies in constantly expanding and closing businesses that is caused when the economy frequently goes into boom and into recession. There’s more to cover on this, but it belongs in the notes2.

Household budgets have no similar social incentive to go into debt or to make savings at any particular time based on market conditions. It’s all about what provides the most utility for the household. (ie. do we invest in a car so we can move items and people around more efficiently, or do we save that money to maybe afford a property for our grandkids assuming we can save at more than the inflation rate of house prices?)

Like people who complain about things being a “slap in the face” deserve at least one face-slap to provide comparative context of why their statement is wrong, people who claim a national budget is like a household budget should really try to modulate the speed of the economy by going into debt during a recession and see how that bloody works out for them.

So, unless you’ve been living under a rock, or are from outside our fine country of Aotearoa New Zealand, you’ve probably heard a lot about the Living Wage recently, given some pretty exciting advocacy that’s going on for it, especially in the context of a measly 25c raise to the minimum wage in a country where productivity has still risen higher than wages have. (ie. we are getting underpaid for the same amount of work, when compared to our parents and grandparents at our ages) And that’s not even mentioning the government’s stone-hearted ambitions for a low-wage economy, with an anemic minimum wage.

A lot of the media coverage has focused on the difficulties of implementing a living wage for businesses that currently pay near the minimum wage for some workers. While it is reasonable to feature the challenges for employers, these complaints should not recieve the amount of coverage they have, as they’re really not relevant as the short-term challenges will go away when the stimulative effect of higher wages hits the economy as a whole in the form of increased purchases and tax revenues. (again and again, economists that study real data as opposed to models have shown us that putting money into the pockets of people with low wages is the best way to grow the economy, because they will actually spend that money because they have a lot of unmet needs and wants) There has been roughly equal coverage on these difficulties and the novel (to the press, and to people working in service industries, by and large) concept of being paid enough to take time off for family, or to be able to afford say, library fees, on top of rent and food for yourself and your family, if you support one.

Like many people probably will, I had a pang of insecurity about this news- I’m not paid that much more than the living wage myself, and I’m working in a very high-stress environment where I’m held accountable if I make any errors and yet still expected to deliver to a high standard on both quality and volume. But that doesn’t mean that people who are paid less than me now don’t deserve a raise- it probably just means I deserve one too, but that the market is broken and not set up to pay fair wages to people like me or more especially to people on the minimum wage.

We’re so eminently class-conscious, so afraid of this right-wing boogeyman of class war against the wealthy, (and by extension: those less-worthy people catching up to US, putting US on the bottom of the heap- as if the people on the bottom don’t deserve a fair go, too) that the people campaigning for higher wages aren’t talking about owning anything significant, about the equity in earning enough that you can reasonably afford the sorts of services you provide to other people, but rather that we’re merely talking about access to basic services, food, and rent. Granted, some trolls will think that say, internet is not a “basic service”, but that’s getting into the territory of saying that you don’t deserve a microwave, or a freezer, because you’re a labourer rather than, say, a computer programmer or insurance analyst. Some of these services sound fancy when you consider the high-end uses of them, but we’re literally talking about entry-level internet here. Dialup if you’re in a city, or internet at all if you’re out in a relatively rural area. Being able to email your parents, or actually check wikipedia if you don’t understand something, or look up an obscure word quickly using an online dictionary, being able to request government forms online instead of waiting on hold.

We are setting our sights so low that the actual pushback against people who support the trends in our society of the median wage being more than twice the average wage1, 10% of the population owning a majority of the wealth in our country is literally as meagre and eminently reasonable as “please pay us enough that we can both have kids and afford to read or surf the net in our miniscule spare time”. Some elements of corporate culture have gotten so ridiculous that we ought to be pushing back against things like highly vertical workplace hierarchies, (which are a machine for bullying people, even if that bullying is only restricted to accepting unfairly low wages) executives getting paid more than their actual value to the organisation, and a demotivatingly high amount compared to on-the-ground workers, and we should be saying that we should get paid enough to save for a house, to pay off our student loans within a decade, to be able to save to travel. Those are actually ambitious goals for wages where there is some room to debate about the reasonability of everyone being able to afford those things. It’s ridiculous that to even get coverage about low wages we have to point out that some people are literally not paid enough to live a decent life.

While I’m anything but a labour activist, this quite clearly makes the case for unions in my mind- there needs to be an independent force that can exert some further upwards pressure for ordinary people’s wages, once we get everyone paying a living wage. This campaign is excessively reasonable, and there’s no way to argue against it without sounding like a buffoon or a heartless Scrooge. I want more than a living wage, and I think any skilled worker should be earning dollars more.